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Working The Line

Most entrepreneurs who run short-line railroads are train buffs with plenty of enthusiasm but little business sense. The owners of the Cairo Terminal Railroad get their kicks a different way. They make money.

This is one locomotive that isn't bound for glory. It has barely moved a hundred years when suddenly it shudders, slows to a crawl, groans, and dies. Bill Mowatt, 51, leaps from the cab and throws open the engine cover. Passing by, you would have thought it odd: a middle-aged man working on a lone, dilapidated engine on a section of weed-choked track.But the 30-year-old locomotive is the workhorse of a lucrative, freight-hauling short line, and Mowatt is one of the principal owners, managers, and operators. Sometimes, he is also the mechanic.

"I want to make one thing very clear," mutters Mowatt, wiping sweat from the grimy creases of his face. "I am not a 'train buff.' Maybe you find this stuff romantic, but I'm running a business here. So erase the term 'train buff' from your vocabulary. This isn't damn hobby. In fact, I'll be truthful with you. I don't even like trains."

Certainly, he is not sentimental about them. And Cairo, Ill., the home depot of his line, isn't the sort of place where train whistles in the night evoke romantic yearnings. Cairo (pronounced "Kayrow") is a once-thriving port on the Mississippi and Ohio rivers, with a population of 6,127, few businesses, and high unemployment. It is no place for a promising business start-up, either -- especially one in a precarious industry. Of the roughly 380 short railroad lines still in existence, at least 25 have gone bankrupt in the past five or six years, and scores seem ready to follow. In an age where most freight is shipped by trucks, it is wise not to be sentimental about trains.

Even so, owning a short line seems an enduring entrepreneurial dream. In the past 10 years, 134 new short lines have been formed, a large percentage of them since the last 1970s and early '80s, when deregulatory railroad legislation made it easier for large railroads to sell of unprofitable branch lines. When the federal government sells Consolidated Rail Corp. (Conrail) to the private sector, probably early next year, the new owners may slough off hundreds of miles of track, providing a windfall of opportunity for aspiring short-line owners.

"A short line is an extremely risky undertaking, but it can be quite profitable if it's done right," says Peter Gilbertson, an attorney with a Washington, D.C.-based law firm that specializes in transportation and short-line finance." A lot of entrepreneurs buy them because they love railroads, but it takes more than good intentions to run one. Since short lines are formed from abandoned track, they're money-losers to begin with. So, when a line does make it, it's usually the story of a tough turnaround."

Mowatt's Cairo Terminal Railroad is one of those stories. In 1982, when Contrail abandoned a 160-mile branch line in Illinois, running from Mount Carmel to Cairo, Mowatt and two friends, Bill Cecil and Dick Hockgeiger, faced the loss of their jobs. They had worked the Cairo line for decades, and were long settled with their families in Mount Carmel. They were in their late forties, mid-fifties, at the time -- too young to retire but too old to change.

"Conrail gave us two choices when they put the Cairo line up for sale," says Cecil, a portly man with a quick smile. "We could by transferred to another location far away, or be unemployed." Like his two colleagues, Cecil speaks with the thick, soothing roll of Cairo's two rivers. Although geographically in the Midwest, culturally their place is in the South -- an old South of river barges, loamy bottom land, and run-down railroads. So their choice was not hard. They spurned Conrail's offer of reassignment, and decided to save their jobs by purchasing the line.

To preserve local rail service, the federal and state governments have recently implemented several programs to provide financial assistance for entrepreneurs who buy short lines. The prospective buyers of the Cairo line, however, preferred to go it alone.Each took out a second mortgage on his house, and together they ponied up $135,000 to buy two rebuilt diesel locomotives, one lime-colored caboose so old that no one can fathom when it was built, and an eight-mile segment of worn track in Cairo. Another $15,000 was invested to rehabilitate the line. "The track needed work because Conrail and its predecessors had neglected it," Mowatt says disdainfully." On one section, I counted only every 45th tie as any good."

What the three men lacked in business training, they compensated for with more than 100 years of combined experience in railroads. "We've worked in railroads all of our lives," says Hockgeiger, the quietest member of the group. He started when he was 16 as a clerk with the New York Central, which later became Penn Central, the largest of the six bankrupt Northeast railroads that were nationalized and merged into Conrail. In more than 30 years of railroading, the highest rank Hockgeiger ever reached was chief clerk. "Hard work on a railroad is all I know," he says.

Bill Mowatt, perhaps, has the best grasp of basic business economics. He took over as president of the company, the others as vice-presidents. When Mowatt isn't working on the railroad, he is helping manage his family's 650-acre farm in Mount Carmel. All three men share the daily administrative and operational tasks, but Mowatt spends most of his time in the office, cutting deals and keeping the books. "When we started this thing, I knew there were certain prerequisites that needed to be satisfied," he says. "Too many entrepreneurs ignore the basic realities of short-line ownership."

One reality is the need to bid quickly on lines that are candidates for abandonment. Once a break in service occurs, traffic is diverted, often permanently. The entrepreneurs behind Pocono Northeast Railway in Pennsylvania, for example, became entangled in red tape for a year and a half while negotiating the purchase of the line from Conrail; by the time they finally opened for business in September 1982, the line had lost a large percentage of its traffic. Once shippers quit a railroad, it isn't easy to get them back.

Mowatt and his partners leapt over that pitfall. They made sure they were one of the first to bid on the Cairo line. Another group stepped in later and offered Conrail considerably more money, but it bungled its chance: It couldn't handle the railroad bureaucracy as adroitly as the three veterans from Conrail. A year after Conrail announced that the Cairo line was available for purchase, Mowatt and his crew were the owners.

At first, some of Cairo Terminal's potential customers were hesitant to rely on a railroad they feared might go bust any day. The only way to get them aboard, the owners of the line realized, was to offer them rates that were cheaper than local trucking rates. The Staggers Act of 1980 essentially gave railroads the freedom to set their own rates; before that law, rates were set by a government agency. A tiny short line like Cairo Terminal, however, lacks the economy of scale that allows large railroads to undercut the prices of truckers. Short lines have an average length of 28 miles, and are defined by the Interstate Commerce Commission as Class II carriers, those with yearly revenues of $10 million to $50 million, or Class III carriers, those with revenues of less than $10 million. To charge cheap rates, these lines must run on a shoestring.

Short lines save overhead on labor, often the single greatest expense of most railroads, particularly Class I carriers. Short-line managers, because they have flexibility, can secure arrangements with workers that are cheaper than those traditionally found at larger railroads, which have been plagued for years by expensive labor contracts, union featherbedding, and restrictive work rules.

At Cairo Terminal, the relationship between management and workers is surely one of the smoothest in railroad history. Mowatt, Cecil, and Hockgeiger employ only three full-time people -- themselves. Occasionally, they hire a couple of part-timers to help in a crunch. But most of the time, the company's top executives are the same men who drive the locomotives, switch the tracks, pound the ties, and hitch the cars. They strive to rotate jobs in an egalitarian fashion, but their posts tend to match their abilities. Cecil, with the most experience as an engineer, usually mans the locomotive throttle; Hockgeiger does the hitching and switching; and Mowatt wheels and deals and pushes paper.

"You might say we've got labor costs well covered," drawls Mowatt with a sly grin, pulling on his ever-present cigarette. "It costs us 75% less to run this line than it cost Conrail. We're not like the big railroads, where engineers can command $60,000 a year, plus fringes, and overpaid people will only work at their prescribed tasks."

With a lean operation, and the ability to charge competitive rates, Cairo Terminal began operations in early 1982. On the first day of business, a locomotive tottered off the rails. A few hours later, Mowatt and his men had the machine back on the track, and their careers as short-line owners were officially baptized. The date was April Fools' Day.

They laugh, three old railroad men sitting around a table, devouring beer and double cheeseburgers on a hot afternoon in Mack's B-B-Q, an eatery on Cairo's dusty, deserted thoroughfare. Country songs from a jukebox waft over the booths. The men tell their stories as though they had rehearsed them. Or maybe old railroad men just know how to tell good stories.

"I remember that cold snap we had last winter, when we were out on the line in the middle of the night, trying to keep one of the locomotives from freezing up on us," says Cecil. "My God, there must have been a wind-child factor of 40 degrees below zero. Never been so damn cold in my life. There we were, wrapping foam rubber around the pipes in the engine, trying to keep 650 gallons of diesel fuel from gelling, and pouring alcohol on the switches so they wouldn't freeze up, too. Can you imagine the overtime a large railroad would have had to pay to get its people out there to do all that?"

A willingness to provide service at any time, sometimes under harsh conditions, is one of Cairo Terminal's strongest marketing techniques. It is neither feasible nor economical for a large railroad to give the personalized, locally oriented service that is the specialty of short lines. Cairo Terminal's first customer, Burkart Foam Inc., needed that kind of service to survive. And Cairo Terminal, with no other customers in the beginning, needed them almost as badly.

"Without Cairo Terminal, we couldn't have stayed in business," states Carl Lasley, plant manager of Burkart, a $25-million automotive- and commercial-parts manufacturer in Cairo. The company, with about 300 employees, is the largest -- and virtually the only -- employer in town. It buys scrap foam, converts it into parts for carpet underlay, and ships it out again. Trucking in the scrap, in sufficient quantities, is too costly. "One boxcar equals almost two truckloads," says Lasley."My life is easier because of [Cairo Terminal]. Sometimes I need a shipment at odd hours, and they're available whenever I call them."

In its first year, Cairo Terminal racked up revenues of $98,000. "That's not bad," says Mowatt, "when you consider that Conrail didn't think the line was worth it." Nevertheless, the railroad only broke even, and there wasn't enough money for the three partners to draw salaries.That year, they lived off their savings. With only one customer, and a line that reached few additional businesses, they felt the need to expand.

Then, in 1983, Illinois Central Gulf Railroad (ICG) decided to abandon a 17.5-mile branch running north from Cairo. Cairo Terminal immediately bid for it. This time, however, the owners needed extensive financing. From the Illinois Department of Commerce and Community Affairs they secured loans worth $740,000, using the line's assets as security. The Illinois Department of Transportation made an outright grant of $180,000 for track rehabilitation. Another $55,000 was lent by on-line shippers, which had a keen interest in preserving rail service. "Our debt doesn't bother me," says Mowatt. "Most of it is in the form of low-rate, long-term loans. State governments like to give small railroads like us a break."

By purchasing the new line, Cairo Terminal added two paying customers. What it didn't add was more employees, and it wasn't long before 18-hour workdays were common. "I haven't had a day off in a long, long time," says Mowatt. He might be complaining, or proud.

An even more problematic aspect of the purchase was 4 1/2 miles of track that connected Cairo Terminal's original line to the new one. ICG owned it, and they didn't want to sell it. To run a countinuous railroad, Cairo Terminal is obliged to pay ICG a right-of-way fee for every car that passes over the section. Thus, like many short lines, Cairo Terminal lives in the shadow of a larger railroad that has the power to derail it.

"It is extremely important for a short line to have good relations with the Class I carriers it depends on," says Mowatt. (Class I carriers, such as ICG, have revenues in excess of $50 million.) "You don't want to alienate them, because they can blow you right out of the water.If ICG suddenly decided to raise the fees we pay for tracking rights, it could ruin us." As one might expect, Mowatt spends a good portion of his time in the executive suites of ICG, mollifying its officials and keeping them apprised of his company's intentions.

By following the right steps, preparing for contingencies, investing in track rehabilitation, and getting their own hands dirty, the owners of Cairo Terminal have proven that an unwanted rail service can indeed bring in cash. In 1984, revenues reached $289,000, finally enough money for the three partners to pay themselves. "Some people get a thrill from riding trains," says Mowatt, who expects revenues to top $400,000 in 1985. "I get a thrill from making money."

And the short line continues to get longer. Last March, a community development agency in Jackson, Mo., purchased 18 1/2 miles of track from Missouri Pacific Railroad, which was planning to abandon it. The agency, acting at the behest of local businesses that depended on the line, asked Cairo Terminal to lease and operate it. Under the agreement, Cairo Terminal has the first option to buy the track at a fire-sale price if they run it at a reasonable profit for the next five years. Although it is too early to tell how much traffic it can attract, the Jackson line comes with at least 14 customers.

One of them makes bricks. "If we had lost the use of the Jackson line, we would have had to load bricks on trucks and ship them 18 miles to the nearest railroad," says Loyd Birk, traffic manager of Kasten Masonry Sales Inc., in Jackson. "We would have had to raise the price of our product. Even worse, it would have stranded this city. I think Cairo Terminal can make this line work."

Gathered in their cramped office in the back of a florist shop in downtown Cairo, the three gray-haired rail barons discuss their company's future. "We don't want to get too big and unwieldy," states Cecil. "After all, our major advantage is in being small. If we purchase more track, we'll have to start hiring extra people. There's only so much the three of us can do with our time." During the weekdays, they live in Cairo; on Friday nights, they drive 135 miles to see their wives and children in Mount Carmel. On Monday mornings they drive back to work. Cairo, stupefied with poverty, plagued by roaming gangs of unemployed youths, is not the best place to raise kids.

"But that's the life of a railroad man," Hockgeiger says with a sigh. "We've always spent most of our time out on the road. It takes a special breed of woman to put up with a husband who works in this business."

"I really do hate railroading," Mowatt insists, apparently without facetiousness. "This is just a job. If I thought I could make more money running a McDonald's franchise, I'd quit this company tomorrow."

You can believe that if you want to. But when tomorrow comes, and the morning sun tears up the mists over the fields, you'll probably find Bill Cecil and Dick Hockgeiger hauling freight as usual, the wind in their faces and the rumble of box-cars at their backs. And Mowatt will be at his desk, juggling typewriter and telephone, wondering how much work three rail hands approaching their sixties can take.